The Net Present Value Method Is a More Conservative Technique

question 50

Multiple Choice

The Net Present Value Method is a more conservative technique for selecting investment projects than the Internal Rate of Return method because the NPV method

• A) assumes that cash flows are reinvested at the project's internal rate of return.
• B) concentrates on the liquidity aspects of investment projects.
• C) assumes that cash flows are reinvested at the firm's weighted average cost of capital.
• D) none of these.

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Definitions:

Short Run

A time period in economics where at least one factor of production is fixed, limiting the immediate response of a firm to changes in market conditions.

Fixed Costs

Fixed costs are business expenses that remain constant regardless of the level of production or sales.

Average Variable Cost

The total variable cost divided by the quantity of output produced.

Output

The amount of goods or services produced by a company, sector, or economy.